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Does medical scheme legislation need a revamp?

01 November 2016 Graham Anderson, Profmed

Late Joiner Penalties (LJPs) are a vital mechanism in mitigating risk by medical schemes. However, the industry must urgently revisit other options to help keep member contributions down.

LJPs are designed to decentivise people from joining medical schemes only when they are older or becoming ill and were implemented in the Medical Schemes Act of 1998.

Sussing out the problem

Before that, schemes were able to ‘risk rate’ members meaning contributions could be based on factors such as age and state of health.

Now, medical schemes have very little protection from people who effectively join a medical scheme, claim for a large procedure or treatment and then exit the scheme once they are better. This places great strain on risk management within medical schemes.

Apart from LJPs, medical schemes can implement a three-month general waiting period and a 12-month condition specific waiting period for new members. This is insufficient because it does not adequately protect schemes from people joining and leaving in a relatively short period of time.

The lack of underwriting options available to medical schemes is one factor that is resulting in rising contributions.

Utilisation is climbing every year which will inevitably result in higher member contributions to cover these increases.

Managing the risk

In order to manage risk, and thereby utilisation levels and contributions, South Africa urgently needs to revisit relevant legislation with two underwriting options; a risk equalisation fund and universal coverage.

Both of these options were discussed when amendments were being made to the Medical Schemes Act in the late 1990s, but were never implemented.

The risk equalisation fund works by requiring schemes with low-risk profiles to pay into a central fund, which would be used to subsidise those with high-risk profiles.

Universal coverage, meanwhile, would make it compulsory for people who earn above a predetermined salary to be a member of a medical scheme. It is believed that universal coverage would act as an effective tool for reducing the ever-increasing average age of medical schemes, which currently is placing a strain on the reserves of medical schemes.

Revisiting current legislation

Both the risk equalisation fund and universal coverage, however, are unlikely to be considered as the Department of Health forges ahead with its plans for National Health Insurance (NHI).

It is essential that South Africans are provided with universal healthcare, but NHI in its current form is just not affordable.

Public healthcare is failing the people of South Africa, with the exception of some centres of excellence.

Government’s first priority should be bringing public healthcare up to standard before looking at the possibility of universal healthcare through NHI.

Amid ageing member profiles and rising utilisation, we urgently need to revisit current legislation. The industry needs more underwriting options to protect itself from risk factors and help keep member contributions down.

When looking at how LJPs are calculated, the total years without cover are separated into four bands, each of which equals the additional payment a member must make on top of contributions. Total years without cover = Application age - (35 years + years of previous cover)

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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